Last month’s article introduced you to a model you may find helpful in negotiating a pathway through the challenges currently presented by COVID-19 and its impact on your financial security, family and interpersonal relationships, your mental wellbeing and physical health and fitness.
This month I will introduce you to a model you may find useful to plan your way out of the damage you may have experienced as a consequence of the impact of the Stage 3 and 4 restrictions on your employment or business, your home life and your dreams for the future.
As I explained in my previous article you have a choice of adopting a wait and see (reactive) approach to the future or a forward looking (proactive) approach to navigating your future as an individual or household. I hope you choose the latter approach, because you do have the power to map out and define your future. Alternatively, “if you don’t know where you want to go, then it doesn’t matter which path you take” Lewis Carroll: Alice in Wonderland.
Most of us caged Melburnians have never had to deal with so much uncertainty, so many fundamental changes to the operation of our businesses, our employment and our home life, unless you have experienced leaving your former homeland and migrated to Australia in search of a better life. So if ever there was a time to focus on the future and how we may wish to accommodate the plethora of changes and challenges that will impact on our goals and dreams for the future, surely it is now.
Most successful businesses have strategic plans extending five or more years into the future which map the pathways necessary to follow in order to achieve their long term goals and objectives.
My focus will be on adapting this process for use by individuals, couples and families.
The model I am suggesting you could use to plan your future beyond COVID-19 comprises the following steps:
Goal Setting → SWOT Analysis → Strategy Formulation → Review Goals
1) Goal Setting
Goal setting is all about you (and your partner and family) determining your destination. This can be an individual or family exercise where you all put down on paper measureable, attainable, relevant and time-lined goals that should motivate you to succeed.
It may be helpful to start with a brainstorming exercise prior to sorting ideas into:
a) the big picture describing “what you want to do with your life” for the next 10 years and what you ultimately want to achieve, then proceeding to
b) breaking these primary goals down into milestones along the pathway you must travel to achieve your lifetime goals but,
c) above all else, your goals and milestones must be realistic, achievable and deserving of a reward or celebration when achieved. (Scott Pape – The Barefoot Investor calls these “date nights”.
Maybe now is a good time to read this best seller book).
Examples of goals may include, reaching CEO status in your employment, setting up and growing your own business to the stage where you can pass it on to your children, studying for a degree or trade qualification, moving out of Melbourne and downsizing to a country town or city, or setting a retirement date and retirement fund target.
2) SWOT Analysis
The next stage of the planning model helps to refine the goals you have initially set and will guide and inform the strategies you may need to execute in order to enhance the chances of achieving your goals.
You could use the above table as a guide to brainstorm and generate a list of your major strengths, weaknesses, opportunities and threats. Goals may not be achievable unless your pathway to achieving them is built upon your strengths which in turn are utilised to exploit the opportunities that are available or are likely to emerge from the external environment. Periods of great change that we are currently experiencing should provide a fertile hunting ground for identifying the opportunities your skills and abilities should enable you to build the pathways and set the milestones required to reach your goals.
Amongst the many opportunities that spring to mind include the thousands of good businesses being forced to close or liquidate that cashed up buyers could acquire, the decline in the use of the postal system and increased use of couriers, increasing demand for services for the aged who are in receipt of aged care at home packages, working from home opportunities and the use of the video media for face to face contact, opportunities for the young unemployed to undertake fruit picking and harvesting work on farms in the absence of available backpacker labour and home schooling coaches for students unable to attend school for various health or locality reasons or needing to catch up on lost learning time, just to mention a few.
Offsetting your strengths and opportunities are the weaknesses and threats that you should list and address so you can focus on mitigating their impact on your strategies for achieving your goals. Weaknesses may be addressed through education and training programs, counselling and support from family and friends and maintaining good physical and mental health. External threats are more difficult to avoid or eliminate as they stem from the external environmental and may be the product of economic conditions, government policy and changes in laws and regulations. Nevertheless creating a list and planning to mitigate their possible impact on your pathway to achieving your goals is an important component of your planning process.
Your SWOT analysis should not remain set in concrete but should be a living work in progress requiring regular review and updating when appropriate, particularly the external components, opportunities and threats, which will continue to be fluid in our ever changing economic and political environment.
3) Strategy Formulation
Whilst goal setting and SWOT analysis helps clarify what you want to achieve and the major milestones and pathways that should lead you in the right direction for achieving your goals, you will also need to plan what strategies are necessary to give you the best chance of achieving your goals. Grasping opportunities and building on your strengths will determine what you could plan to do whilst strategies will spell out how you will implement your plan.
This stage may be quite challenging because without sound workable plans that articulate all facets of how you are going to make your plan work, too much can be left to chance and you could end up back in Alice in Wonderland.
Example :
Martin is a sole trader operating a courier business in Melbourne with his own delivery van earning a net taxable income of $75,000 per annum yielding an after tax cash flow of approximately $57,580. He is a widower with two grown up children currently studying at university but still living with him in the family home currently valued at $750,000 with a mortgage of $150,000. Martin’s super fund balance with Australian Super has a balance of $350,000 and has an average rate of return over the past 10 years of 7%.
Martin’s Main Goals:
1) Martin is aged 55 and his goal is to retire at 67, be debt free and have sufficient superannuation to meet his living expenses without having to rely upon the age pension.
2) He also loves fishing and wants to sell up and move to Cairns, buy a smaller home with an ocean view and own a small fishing boat and 4WD capable of towing the boat.
Martin’s SWAT Analysis:
Martin’s Strategy:
At the moment Martin has a planning horizon of 12 years and his two major goals are:
1) retiring no later than age 67 as a self-funded retiree and
2) downsizing his residence by relocating to the Cairns region of North Qld.
To achieve these goals will necessitate putting in place a number of financial strategies. A good comprehensive life plan should also address a number of other dimensions including maintaining good physical and mental health, nurturing and maintaining links with family, friends and community as per my model explained in the September issue of The Diary.
There are a number of financial strategies available to Martin which will need to be put in place together with shorter term milestones to be achieved along the journey. Depending upon his financial planning skills, Martin may need to engage the services of a financial adviser to assist him in putting his financial plan and strategies in place.
A sensible starting point is to prepare a twelve month budget to determine the estimated after tax net cash flow from the business, plus income from investments less private expenses as explained in my September article.
Martin has a $150,000 mortgage on his house and his goal should be to have that paid off prior to his retirement date.
Martin also needs to grow his present super fund balance of $350,000 so he must also set a target balance required to fully fund his retirement if he is not to rely upon a part age pension. If his super fund continues to average a 7% return over the 12 years until age 67 then the balance in the fund without any further contributions could grow to approximately $788, 000.
Would that amount be sufficient to fund Martin’s living expenses from age 67 to 74 at the minimum required draw down rate of 5% being $39,413 in today’s dollars? Or would Martin need to draw down more and progressively reduce his fund balance?
What other strategies are available to Martin?
- Make concessional contributions up to a maximum cap of $25,000 per annum out of his after tax earnings of $57,580 plus tax savings of (25,000 x . 345)= 8625 – 25,000 leaving net after tax income of $41,205. Out of this amount the mortgage balance of $150,000 needs to be paid off over 12 years = $12,500 of principal p.a. plus interest leaving approximately only $25,000 to cover all other living expenses.
- After testing the above strategy it seems Martin may have to choose between either paying down the mortgage and not contributing $25,000 to super each year or alternatively compromising by paying the minimum mortgage repayments and making a much smaller concessional super contribution. This is a very common conundrum faced by many pre-retirees.
- Could Martin generate more income from his business being a sole operator with a single delivery van? Could he work seven days a week making deliveries over the weekend as well as on week days? Could he employ a casual driver to share the driving over a seven day week? Could he grow the business in line with the growth in on-line purchases and click and pick-up purchases? Could he purchase a second delivery van and employ a full time employee or contract in a driver with his own van? This would be a classic case of expanding his business by combining strengths with opportunities.
- A longer horizon strategy could be for Martin to wait until he turns 65, sell his house in Melbourne, qualify for the Downsizer Super Contribution of up to $300,000 and increasing his retirement fund balance from $788,000 to up to $1,088,000, pay out any remaining mortgage balance and look to purchase his smaller residence with an ocean view in the Cairns region of Nth Qld.
Review Goals:
The initial goals you set together with the milestones along the way should be reviewed on an annual basis as changing circumstances, both personal and in the external environment will inevitably require a rethinking of both goals and strategies.
Never in living memory has there been a greater need for strategic planning both in businesses and on a personal level and never have Melburnians faced so many challenges and uncertainties. So it is up to you whether you want to go forward living your lives like Alice in Wonderland or in an environment where you have taken the “bull by the horns” and proactively taken control over your future.
Remember a plan is initially only a document of what you could do which you can adjust any time or rip up and have another go at determining the future you want to have for your business, yourself, or your family.
Useful Sources for Preparing your Personal Strategic Plan
MindTools .com/ Personal Goal Setting
MindTools.com/Personal SWOT Analysis
youroneextraordinarylife.com/personal-strategic-plan
Disclaimer:
The content of this article is not intended to be relied upon as professional advice but reflects my interest and experience in assisting individuals, couples and organisations in planning their future and my academic background in lecturing in this area at Swinburne University.
Brian Spurrell B. Com, B A, Dip. Ed., (Melb. Uni.) FCPA, CTA, Reg. Tax Agent.
Director, Personalised Taxation & Accounting Services Pty Ltd
Mobile: 0412 011 946
PO Box 143 Warrandyte 3113.
Web: www.ptasaccountants.com.au